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CVS Health enterprise on solid footing; raises midpoint of earnings outlook


At its annual Analyst Day in New York Wednesday morning, CVS Health raised the midpoint of its earnings outlook for 2016.

“Over the past several years, CVS Health has been preparing for the changes in the health care landscape by expanding our extensive suite of leading assets and capabilities,” stated Larry Merlo, president and CEO CVS Health. “We are now positioned more broadly than ever with the right strategy across the health care continuum to create real value by enhancing access, driving better health outcomes and reducing overall health care costs. We are the only health care company that is truly channel-agnostic, and we can help drive superior health outcomes as people move through the continuum of care. Our consumer expertise gives us an edge in the increasingly consumer-directed health care environment.”

Don't compare CVS Health to CVS/pharmacy or even CVS Caremark, Merlo told analysts. It's an apples and oranges comparison as CVS Health is today a comprehensive integrated healthcare company seeking shareholder value and growth across the entire healthcare spectrum.

“We’ve built a one-of-a-kind company and we’re not standing still," Merlo stated. "Over the past year we have made long-term, value-enhancing investments and introduced innovative new products. We continued to add to our competitive advantage, expanding our core pharmacy business while broadening our reach into new health care channels. We have become an integrated health care enterprise and we manage the business through an enterprise lens," he said. "We hold leading positions in multiple interrelated health care and pharmacy areas, including retail pharmacy, pharmacy benefits management, specialty, infusion, clinical programs, retail clinics, medical claims editing and long-term care. No one is better positioned than CVS Health to respond to the health care challenges that millions of Americans face throughout their lifetimes.”

CVS Health realized a strong 2016 selling season for the pharmacy benefit management business with $11.5 billion in net new business and a client retention rate of 98%. The company has generated superior specialty revenue growth of approximately 33%, outperforming the rapidly-growing specialty market. In addition, CVS Health has enhanced its generic sourcing through the Red Oak Sourcing venture with Cardinal Health.

Other 2015 highlights include the acquisition of Omnicare, a leader in long-term care pharmacy; the transaction to acquire and operate Target’s pharmacies and retail clinics; continued advancement of the company’s front store growth strategies with a focus on enhancing health and beauty offerings, store brands, personalization and digital; and elevated awareness of the CVS Health brand introduced last year.

“We know that prescription utilization is projected to continue to grow due to the aging population and a higher incidence of chronic disease,” Merlo said. “But we must also keep in mind that this spend has value as pharmacy care is the most cost-effective line of defense against mounting health care costs. Furthermore, we have more ways in which we can engage patients and help drive medication adherence, thus improving health outcomes and lowering overall health care costs.”

In order to address the high cost of prescription drugs, CVS Health will deliver more than $6.4 billion in incremental savings for PBM clients from 2012 through 2016 through formulary management strategies. Growth in pharmacy costs for our clients through September of this year slowed to 6.4%, as compared to 11.8% for full year 2014.

The company raised the midpoint of its 2016 outlook and now expects Adjusted EPS to be in the range of $5.73 to $5.88, reflecting solid year-over-year growth of 11.25% to 14.25%. The bottom end of the range was increased by $0.05 per share from the preliminary outlook provided on the company’s third quarter earnings call. This Adjusted EPS guidance excludes the effect of acquisition-related integration costs, and it assumes the completion of $4 billion in share repurchases during 2016. The company expects to deliver free cash flow of $5.3 to $5.6 billion and cash flow from operations of $7.6 to $7.9. This free cash flow guidance includes approximately $500 million of acquisition-related cash outflows.

The company also announced that its board of directors approved a 21% increase in its quarterly cash dividend, to $0.425 per share on the common stock of the company. The increase translates to $1.70 per share annually, up $0.30 per share. The increased quarterly dividend will be payable on Feb. 2, 2016, to shareholders of record on Jan. 22, 2016. This marks the company’s thirteenth consecutive year of dividend increases; since 2011, the compounded annual growth rate in dividends has been 28%.

“We continued to deliver on our promises in 2015, and our 2016 guidance is no exception”, said Dave Denton, CVS Health executive VP and CFO. “Our outlook for 2016 is nicely in line with the five-year steady state targets we provided in December of 2013, and we continue to target solid enterprise growth and the generation of a significant amount of cash that will be available to enhance returns. We will continue to utilize our free cash flow to drive returns for our shareholders through value-enhancing investments, dividends and share repurchases.”

“Our strategic framework for enterprise growth is centered on growing our core pharmacy business while entering into new spaces in the health care market,” Merlo added. “While adding capabilities to enhance our core business, we will deepen relationships with payors and providers, enhance patient engagement, continue innovation in drug procurement and supply chain efficiencies and execute opportunistic bolt on acquisitions.”

Merlo concluded: “We remain very optimistic about the opportunities that the evolving health care market is creating for CVS Health. I firmly believe that we have the right strategy in this evolving market to capitalize on these opportunities and drive long-term, sustainable enterprise growth and shareholder value.”

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